You need more than a great idea to fly solo-here's what's involved.
Psst...C'mon. Admit it. If you're not already
operating on your own, you've thought about leaving the nest and making
the leap. Maybe more than once. Many have taken the leap, of course,
and succeeded. But be forewarned: It ain't easy, and if you don't have
a plan, a business model to follow, along with adequate funding to get
started and the necessary wherewithal to withstand the ups and downs,
it could be your road to perdition.
Why? Because it's easy to underestimate the length
of time and procedures involved. And the expenses can be another eye
opener.
"It's much more costly than you think. I realized
early on the load that used to be shared by others was now on my
shoulders," says advisor Ricky Grunden of Denton, Texas, who started
out solo in 2001. "You look around and think I can do all this by
myself, without realizing the weight of business planning, cost and
execution to get it all accomplished."
There are many different variables to consider:
funding, setting up compliance requirements, drafting engagement
agreements, and marketing costs. Should you rent, lease office space,
or work out of your home? Another consideration is the time and cost of
staffing and benefits if you decide to expand your practice.
Initially the key issues to be decided are what form
of practice your business will take, what markets you plan to serve,
and what your ultimate business model will look like. Some may prefer
the lone wolf or solo model, while others will want to build a firm.
The amount and type of expenses will vary depending on where you want
to head with your plan.
There are also stages of development. Initially you
may be able to operate well enough doing all the tasks manually
yourself. But then you may grow to the point of needing to delegate and
automate, at which point expenses tend to increase in lumps, as you
have to hire staff and invest in systems.
So what does it take? Can anyone do it? How much does it all cost?
Four advisors who made the leap weighed in with
their experiences: Grunden; Delia Fernandez of Los Alamitos, Calif.;
Bryan E. Kelly of Bel Air, Md.; and Elise Stevenson of Milton, Mass.,
on her own just a few months.
All four advisors had a variety of motives for taking the plunge.
Fernandez, who manages $20 million today and whose model was to become
a fee-only practitioner, opened her own shop by default about ten years
ago after she was laid off from a corporate public relations job and
failed to find a slot with a fee-only planner. Fortunately she was well
prepared, having done an internship with planner Laura Tarbox in
Newport Beach, Calif., and completed her personal financial planning
certificate at U.C. Irvine Extension.
"I really do love the freedom and control of being
self-employed," says Fernandez. "But I'm so security conscious that had
I not been laid off from a corporate job I never would have gone out on
my own. Basically, I had to be kicked out of working for someone else
to take this step."
Grunden in 2001 left a successful partnership in
North Dallas after 15 years and moved back to his hometown,
fast-growing Denton, to set up a practice. His model, and what he has
become, is a fee-only planner, managing a firm with $47 million AUM and
a clientele consisting of executives from technology and energy
companies and small business owners.
Like Grunden, both Kelly and Stevenson are fee-only
planners who had experience elsewhere and wanted a change. Not happy in
the branch system at Fidelity Investments, Kelly left in 1997. He also
moved back to his hometown, where his aim is to be the go-to guy for
financial planning services.
Just out on her own since July, Stevenson, whose
target market is individuals with assets between $1 million to $5
million, says she wanted more control over client engagements and more
flexibility in her schedule. "I had been working for a financial
planning practice within a medium-sized accounting firm, but felt the
different ways of doing business were not compatible. Also, I had built
up eight years of experience and a stable of clients who I was
confident would go with me. I wasn't starting from scratch."
The method of financing a start-up advisory can take
many forms. Interestingly, these four advisors did it mostly through
savings, though in addition Fernandez tapped equity in her home and
Grunden took out a bank loan to outfit his office and purchase
marketing materials.
Grunden, who appears to have spent the most and has a no-debt
philosophy in both his personal life and business, had an initial
out-of-pocket start-up expense of $60,000. This went for legal fees
involved in separating from the partnership, retaining an architect and
interior design fees, and regulatory licensing. It also went for
computer hardware, portfolio management software, printers, telephone
systems and office furnishings. Another $40,000, he says, went towards
building out the new office space with the goal of classic elegance,
which complemented his clients' tastes. Additional expenses of $20,000
one year later went for imaging packaging costs-Web site content,
brochure design and printing. Included was $6,000 the firm paid for
hiring a marketing consultant for brand positioning and logo design.
"Our prior do-it-yourself materials simply
embarrassed us," says Grunden. "I often hesitated to give out my
business card."
Kelly, whose firm manages $85 million, got started
with the help of savings and a $30,000 bank loan amortized over seven
years. These funds went for office furniture, computer systems,
outfitting and decorating an office, and seminar marketing materials.
"That's about as far as $30,000 goes," says Kelly.
"It doesn't seem like a lot, but when you put all the components (of
starting a business) together, it adds up to a substantial sum." He
recalls with dread, for example, buying a copier at the beginning. "It
was $3,000-used."
Fernandez figures she spent about $15,000 the first
year on software programs, data subscriptions, professional
associations, and meetings, conferences and online service. The biggest
adjustment, she says, was replacing a corporate environment and dealing
with all the technical problems of buying and installing computers and
software.
One cost Fernandez didn't anticipate but now
understands is paper and ink. "There's no such thing as a paperless
office," she avers. "I buy stationery plus really good inkjet paper for
color copies for client presentations, then regular paper for drafts.
With my client load, I must spend $100 a month on these kinds of
supplies."
Another decision solo practitioners face starting
out is whether to rent, lease or work from home. Mainly it's an issue
of how you plan to manage growth, or whether you remain a solo
practitioner. When you're first starting out, working from home, like
Stevenson, can save on renting office space. Even so, she estimates her
total start-up costs at $22,000.
Fernandez says she worked from home her first three
years, later shared space with two other small businesses and now
leases, paying $1,200 monthly for 818 square feet. At the outset she
bought used furniture, but splurged for a desk and hutch ($4,700) where
she works and meets clients. Kelly, on the other hand, opted eventually
to own. "Our first office was in an old house in town that had been
converted into office space. We rented four rooms for $1,100 a month,
and it went up from there. Today, we own our own building."
You also have to decide whether to be your own RIA
or affiliate with an independent broker-dealer. This decision can be
influenced in the beginning by the model of practice you intend to
follow. It often can be key, from an expense standpoint, in that if you
become your own independent RIA you may have more up-front costs,
versus that of affiliating with an independent broker-dealer, which has
costs over time but little up front.
It's easy to underestimate the time involved in getting regulatory procedures completed. Each state has a different approval process. "I was lucky. It only took me a couple of weeks in Massachusetts," says Stevenson, who went the RIA route.
She hired another firm to prepare and file her ADV and draft client agreements ($5,000 initially and at least $2,000 a year ongoing); Grunden had a tax attorney handle all his compliance requirements as a personal favor.
Kelly decided to affiliate with an independent broker-dealer, Cambridge Investment Inc. "It helped us greatly in supplying needed contracts as well as compliance management contracts," he says. It also "eliminated the cost of developing our own contracts with counsel and compliance management."
Fernandez drafted her own compliance documents after soliciting sample ADVs and client agreement letters from a network of planners. "I probably spent 20 hours in all," she says. "It's really important to have a network of planners, if you've established a network, or hire someone who can get it done right the first time."
As your business grows another issue you face is hiring staff. Not only do you have to pay direct compensation but their benefits, which include payroll taxes, unemployment, insurance, worker's compensation and possibly 401 (k) contributions.
Kelly waited for revenues to flow in before hiring, and then hired a part-timer for filing and paperwork. "That lasted about two years. Then we hired our first full-time assistant, and a year later another," says Kelly. "We're a paperless office and depend heavily on technology to provide efficient services to our clients."
"This helped us greatly in keeping our overhead down, which has kept our profit margin at 55% or 60%. In turn, this has allowed us to hold onto our employees without a lot of turnover by compensating them above market."
At the outset, Grunden had good client support with a personal assistant and an office manager-portfolio trader. However, that left him handling all marketing, investment management decisions, financial planning and updates, and meeting with clients.